Understanding GDS and TDS Debt Service Ratios in Residential Mortgage Lending in Canada

When it comes to applying for a mortgage in Canada, lenders evaluate your financial situation to ensure that you can comfortably manage your mortgage payments. One way they assess this is by analyzing your Debt Service Ratios (DSRs). In Canada, there are two primary DSRs used in residential mortgage lending: the Gross Debt Service (GDS) ratio and the Total Debt Service (TDS) ratio. As a Calgary Mortgage Broker, this impacts everything I do, so let’s explore these ratios and their significance in the mortgage application process.

Debt Service Ratios:

Debt Service Ratios are calculations that measure the proportion of your income that goes towards housing costs and debt payments. These ratios provide a snapshot of your ability to manage your monthly financial obligations.

1. Gross Debt Service (GDS) Ratio:

The GDS ratio focuses solely on housing costs and is calculated by dividing your monthly housing costs by your monthly gross income. Housing costs include mortgage principal and interest payments, property taxes, heating expenses, and half of any condominium fees.

2. Total Debt Service (TDS) Ratio:

The TDS ratio considers both housing costs and other debt obligations. It is calculated by dividing your total monthly debt payments (including credit card payments, car loans, and other outstanding loans) plus housing costs by your monthly gross income.

Industry Guidelines:

The Canada Mortgage and Housing Corporation (CMHC), a government-backed mortgage insurer, has established guidelines for these ratios. The CMHC sets the maximum allowable ratios at 39% for GDS and 44% for TDS. These limits indicate the percentage of your gross income that lenders consider acceptable for housing and total debt expenses.

Factors to Consider:

Here are some key factors to consider regarding GDS and TDS Debt Service Ratios:

1. Rental Income:

If you have rental income from an investment property, CMHC allows 50% of the gross rental income to be considered towards your gross income. However, Sagen (formerly Genworth) allows 100% of gross rental income to be used if your credit score is above 680.

2. Other Income Sources:

Certain income sources, such as Employment Insurance (EI) and social assistance payments, cannot be used to calculate your gross income for the purpose of DSR calculations. Lenders typically prefer stable income sources that are expected to continue in the future.

3. Heating Costs:

When calculating the GDS ratio, lenders factor in estimated heating costs. These costs can be determined either from the builder’s estimate or your utility bill, depending on the lender’s requirements.

6. Net Rental Income:

While CMHC allows the consideration of 50% of gross rental income, they also permit the use of net rental income in certain cases when calculating gross income. However, lenders may have varying policies regarding the use of net rental income.

Understanding and managing your Debt Service Ratios is crucial for a successful mortgage application. Lenders evaluate these ratios to ensure that your income is sufficient to cover your housing costs and debt payments without overburdening you financially. By maintaining healthy DSRs within the industry guidelines, you increase your chances of securing a mortgage with favorable terms and conditions.

It’s important to consult with a mortgage professional or financial advisor who can provide personalized guidance based on your specific financial situation. They can help you determine the appropriate housing costs and debt levels to ensure a comfortable and sustainable homeownership experience.